More Public Affairs Issues Settled at State Level

With the Bush administration supporting deregulation and self-policing, the states are taking up the slack. In the wake of the Enron and Andersen scandals, there is a feeling that “Washington’s watchdogs are asleep,” as Business Week put it.

Automakers successfully defeated a push for stricter national fuel-economy standards earlier this year, but their triumph was short-lived. Within a few weeks, the state of California had passed its own bill that would force the car companies to sell more fuel-efficient cars in the state by 2008. If environmentalists can persuade Governor Gray Davis to sign the bill, they hope to put pressure on other states to adopt similar standards.

“We have accepted the fact that environmental leadership is not coming from Washington,” says Carl Pope, executive director of the Sierra Club. “We will focus on consumers and the states.”

It’s not just environmental issues that are being hashed out at the state level these days. With the Bush administration supporting deregulation and self-policing, the states are taking up the slack. In the wake of the Enron and Andersen scandals, there is a feeling that “Washington’s watchdogs are asleep,” as Business Week put it.

“The states are driving more activity today,” says John Ashford, president of The Hawthorn Group. “Not more than Washington, which is still the 800-pound gorilla and enormously more deeply and broadly staffed, subject to more pressure from interest groups, and able to create more public attention. But the states are driving more than is often realized.

“The tobacco industry was brought down by state attorneys general, the HMO industry suffers from state attacks on care, coverage, rates and mergers, the pharmaceutical companies’ Achilles heel is the fact that the largest expense for nearly every state is Medicaid, driven by drug costs, and with nearly every state facing a budget crisis, major industries—especially beer, wine, liquor and other sources of ‘sin-taxes’—face rising state taxes.”

Since the GOP is philosophically supportive of states’ rights, it’s difficult for the Republicans in Washington to condemn increased activism at the state level. And that creates a problem for business, which because of the Bush administration’s laissez-faire attitude now finds itself fighting battles on 52 fronts rather than just one.

“It’s not that federal issues have diminished,” says Leslie Dach, who heads the Washington office of Edelman Public Relations Worldwide. “It’s that the states are also getting in the game. So business needs to fight a two, or 52-front war.”

The Bush administration’s lack of enthusiasm for regulation is only one reason for increased activism at the state level—a trend that has been developing for two decades.

“I am not sure it is a new development,” says Neal Cohen, president of APCO Worldwide. “The notion that the states are the ‘laboratories of democracy’ has been around a long time. That perception may be a function of the fact that as the Congress has become a more difficult institution for reaching consensus and even scheduling contentious issues, the states have become a focus for some issue advocacy and special interest groups.”

Then there’s the perception that it is increasingly difficult to get anything done in Washington.

“Increased politicization and partisan polarization in the U.S. Congress hinders development of smart public policy,” says Phil Armstrong, managing partner at Earle Palmer Brown Public Relations. “Partisan politics and the influence of special interest money more often than not results in legislation that is compromise to the point of being ineffectual. Congress is often deadlocked by political squabble and governance problems, and states become the natural self-correcting mechanism to fill this policy void.”

Dach sees many reasons for increased activity at the state level, including the commitment of the Bush administration to “new federalism,” a belief that the states should handle as many issues as possible. Armstrong agrees. “States have been taking the lead on setting policy since President Reagan introduced the ‘new federalism” in the mid-80s,” he says. “The states have been leading incubators of public policy solutions—leading to adoption by other states and sometime even the federal government.”

And while many clients see activism at the state level as a headache, many public affairs experts believe it has its benefits.

“State legislators and governors are closer to the policy issues such as health, education and social programs that require immediate attention to help real people,” says Armstrong. “Statehouses are able to address problems in a more timely—and often more effective—manner than the U.S. Congress. They work faster in shorter sessions, they are more responsive to the people’s will and less affected by special interests, and the result of their work manifests itself with constituents almost immediately.” Moreover, states are better positioned to experiment with innovative approaches, Armstrong says.

The range of issues under consideration at the state level is broad, with tax and revenue-related issues currently in the forefront.

Says Bob Sommer, head of the public affairs practice at The MWW Group. “About 40 of the states are facing deficits this year and with gubernational elections coming up they need to balance their budgets, which is many cases will mean raising taxes. That creates issues for everyone from healthcare providers—because that’s where so much of the money is spent—to tobacco companies, whose products face higher taxes.”

“Most states right now are going to be focused on economic issues like taxes and appropriations, particularly as the states face more difficult economic times,” says Cohen. “As state budgets retract, the ‘hot’ issues will tend to focus on who wins and who loses in the next budget cycle. A related state issue will be whether states overestimated the budget impact of the tobacco settlement and how they deal with that revenue adjustment.”

Other issues under consideration at the state level range from healthcare service delivery to gun control to security to energy conservation to financial services. Georgia, North Carolina, and California have all adopted tough laws against predatory lending (with lenders running to Congress for legislation that would preempt the state laws), and New York and 11 other states have been conducting their own investigations into conflicts of interest at brokerage firms.

There’s also plenty of activity in the healthcare arena. Says Dach, “The pharmaceutical issues are extremely potent at the state level, particularly threats of cost controls, formulary issues, and reimbursement.” Some states have mandated buying cooperatives to negotiate better deals for drugs, while others have opened their border to imports from Canada.

The increased activism at the state level has taking many companies by surprise, and European and other offshore companies are particularly ill prepared to deal with issues at the state level, says Ashford. “They win approval in Washington and think that’s all they need to do. But it’s not, as U.K. petroleum and power companies found out when obscure state legislature sidetracked their deals until a higher price—to the state—was paid.”

As a result of inertia in the capital and increased activism at the state level, several national interest groups have moved their policy battles from Washington to so-called bellwether states, says Armstrong. A case in point is the effort by environmentalists to raise automobile gasoline mileage requirements in California in the wake of their unsuccessful effort to pass new and more stringent standards in Washington.

Says Armstrong, “The large states set the agenda for development or trial of new policies, regulations and programs. California is most often the leader on issues across the board, but is known best for its energy and environmental policies and practices. Many states look to California for direction on issue challenges they are facing in these and other policy areas. California has also been the source of numerous ballot initiatives on issues such as term limits and education, many of which have emigrated to other states.”

Similarly, New York has led the nation in many policy areas: most recently seat belt laws and limitations on the use of handheld cellular telephones. And its activist attorney general recently forced Merrill Lynch to admit wrongdoing and pay a $100 million fine over conflicts of interest between its investment banking and analyst activities.

State attorneys general are also getting involved in mergers and acquisitions. If the Justice Department doesn’t step in to prevent the merger of satellite TV giants Hughes Electronics and EchoStar Communications, Jay Nixon of Missouri says he will lead a coalition of 30 states opposed to the deal, which he says would eliminate what little competition there is in pay-TV.

For organizations with limited resources, the good news is that a dozen or so “bellwether” states account for the majority of the activity.

“Some states are more active than others,” says Ashford. “First are the states with more active attorney generals. Second are the states with larger legislative, regulatory, or consumer advocate budgets and staffs. Third are the historically more active ‘reform’ states. And fourth are states with a particularly active group of trial lawyers, who are increasingly turning public issues into class action lawsuits. States in each of those categories become ‘bell cow’ states.”

The increased activity at the state level creates a challenge for public affairs firms too. While many have opened offices in major state capitals (several firms have a presence in Sacramento, for example, while others have offices in Tallahassee (Weber Shandwick Worldwide) or Harrisburg, Pa. (Burson-Marsteller), but most rely on a network of affiliates in each location.

To service clients in all 50 states, for example, The MWW Group combines the talents of its own local offices (Trenton and Chicago), with those of its proprietary CapitalEdge network, which it uses to track issues in any or all of the states. According to Sommer, the network “can be activated the moment a problematic issue or legislative item is identified.”

Burson-Marsteller manages state government affairs in a variety of ways, according to public affairs practice leader Richard Mintz. In larger states, the firm maintains its own offices with public affairs pros in state capitols such as Austin, Sacramento, and Harrisburg, or in major markets such as New York, Chicago and Miami.

In other larger states—such as Georgia and Washington—the firm has affiliate relationships, while in smaller states, B-M’s Direct Impact grassroots group maintains a network of smaller public affairs firms and sole practitioners. “In many cases, we have more than one partners, sometimes to cover both Dems and Republicans, or to provide expertise in specific issues,” says Mintz.

Most firms prefer to manage programs centrally from Washington, where most of their public affairs expertise resides.

“We manage state relations centrally from Washington, but do so heavily relying on both regional coordinators and state or local operatives,” says Hawthron’s Ashford. “We have invested an enormous amount of time, attention and resources to building a premier network of local operatives. Our networks include several locations where we have more than one firm, and we use the one best suited to the client’s specific need.”

“We believe that Tip O’Neill’s observation that ‘all politics is local’ holds true today, even in and Internet-enabled society,” says Armstrong, whose firm works with local public affairs shops like CorporateAdvocates in Colorado, as well as a network of firms that make up its State Advocacy Network.

“We centralize strategic planning, research, creative, web management and media relations with our senior program specialists working out of our offices in Washington DC and Denver,” says Armstrong. “At the state level, we organize our network of lobbyists and communications professionals in the states where we are working as a ‘field office,’ from which we monitor state-level activities using a combination of electronic sources and one-the-ground eyes and ears for real time information and developments. The field staff—lobbyists, grassroots organizers and communications pros—is from established firms andconsultancies in those states.”

APCO’s Neal Cohen agrees: “We have always believed that our clients are best served at the state level by combining our best practices team of political and campaign strategists along with in-state practitioners with a day-to-day knowledge of the state. At the national level, we can draw people from any of our offices who have experience in political campaigns, the media, issue advertising, government offices and corporate positions.”

On the lobbying side, while APCO has offices in a few key states like California, Arizona and Washington, it keeps a short list of high quality lobbyists in the states and recommends the ones it thinks are best suited to serve clients’ specific needs. Says Cohen, “Since we do not have any ongoing contractual relationship with these in-state lobbyists, our first obligation is to choose the best people to meet our clients’ objectives—we review their requirements and choose the best lobbyist for that specific need.

“On the non-lobbying side, we have field operatives in 25 to 30 states for different issue campaigns at any given time during the year. These operatives are chosen based on their knowledge of the state, ability to understand our clients’ needs and comfort working with us. We manage these campaigns at the national level but again using in-state resources to engage media and local supporters.”